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Goodwill and Intangible Assets Accounting Policy

Goodwill

Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is tested annually for impairment or more frequently when an event or circumstance indicates that goodwill might be impaired.

ADP's annual goodwill impairment assessment as of June 30, 2017 was performed for all reporting units using a qualitative approach. The qualitative assessment considered industry and market considerations for any deterioration in the environment in which ADP operates, the competitive environment, a decline (both absolute and relative to peers) in market-dependent multiples or metrics, any changes in the market for ADP's products and services, and regulatory and political developments. Additionally, ADP assessed financial performance by reporting unit and considered cost factors, such as labor or other costs, that would have a negative effect on results. Based on the qualitative assessment, ADP has determined that goodwill is not impaired.

Internal Use Software

Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized over a three to five-year period on a straight-line basis. ADP begins to capitalize costs incurred for computer software developed for internal use when the preliminary development efforts are successfully completed, management has authorized and committed to funding the project, and it is probable that the project will be completed and the software will be used as intended. Capitalization ceases when a computer software project is substantially complete and ready for its intended use.

ADP's policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, ADP also capitalizes certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to the time directly spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. ADP also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.

Source: Automatic Data Processing Inc., Annual Report

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Goodwill and Intangible Assets Disclosure

Automatic Data Processing Inc., Statement of Financial Position, Goodwill and Intangible Assets

USD $ in thousands

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Software and software licenses
Customer contracts and lists
Other intangibles
Intangible assets, gross
Accumulated amortization
Intangible assets, net
Goodwill
Goodwill and intangible assets, net

Source: Based on data from Automatic Data Processing Inc. Annual Reports

Item Description The company
Intangible assets, net Sum of the carrying amounts of all intangible assets, excluding goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Automatic Data Processing Inc.'s intangible assets, net increased from 2015 to 2016 and from 2016 to 2017.
Goodwill Carrying amount as of the balance sheet date, which is the cumulative amount paid and (if applicable) the fair value of any noncontrolling interest in the acquiree, adjusted for any amortization recognized prior to the adoption of any changes in generally accepted accounting principles (as applicable) and for any impairment charges, in excess of the fair value of net assets acquired in one or more business combination transactions. Automatic Data Processing Inc.'s goodwill declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.
Goodwill and intangible assets, net Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges. Automatic Data Processing Inc.'s goodwill and intangible assets, net declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

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Analyst Adjustments: Removal of Goodwill

Automatic Data Processing Inc., adjustments to financial data

USD $ in thousands

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Adjustment to Total Assets
Total assets (as reported)
Less: Goodwill
Total assets (adjusted)
Adjustment to Stockholders' Equity
Stockholders' equity (as reported)
Less: Goodwill
Stockholders' equity (adjusted)
Adjustment to Net Earnings
Net earnings (as reported)
Add: Goodwill impairment
Net earnings (adjusted)

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Adjusted Ratios: Removal of Goodwill (Summary)

Automatic Data Processing Inc., adjusted ratios

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
Net Profit Margin
Reported net profit margin % % % % % %
Adjusted net profit margin % % % % % %
Total Asset Turnover
Reported total asset turnover
Adjusted total asset turnover
Financial Leverage
Reported financial leverage
Adjusted financial leverage
Return on Equity (ROE)
Reported ROE % % % % % %
Adjusted ROE % % % % % %
Return on Assets (ROA)
Reported ROA % % % % % %
Adjusted ROA % % % % % %
Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Automatic Data Processing Inc.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Automatic Data Processing Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Net Profit Margin

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Revenues (USD $ in thousands)
Net profit margin1 % % % % % %
Adjusted for Goodwill
Adjusted net earnings (USD $ in thousands)
Revenues (USD $ in thousands)
Adjusted net profit margin2 % % % % % %

2017 Calculations

1 Net profit margin = 100 × Net earnings ÷ Revenues
= 100 × ÷ = %

2 Adjusted net profit margin = 100 × Adjusted net earnings ÷ Revenues
= 100 × ÷ = %

Ratio Description The company
Adjusted net profit margin An indicator of profitability, calculated as adjusted net income divided by revenue. Automatic Data Processing Inc.'s adjusted net profit margin deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Total Asset Turnover

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Revenues (USD $ in thousands)
Total assets (USD $ in thousands)
Total asset turnover1
Adjusted for Goodwill
Revenues (USD $ in thousands)
Adjusted total assets (USD $ in thousands)
Adjusted total asset turnover2

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= ÷ =

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= ÷ =

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted total asset turnover deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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Adjusted Financial Leverage

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Total assets (USD $ in thousands)
Stockholders' equity (USD $ in thousands)
Financial leverage1
Adjusted for Goodwill
Adjusted total assets (USD $ in thousands)
Adjusted stockholders' equity (USD $ in thousands)
Adjusted financial leverage2

2017 Calculations

1 Financial leverage = Total assets ÷ Stockholders' equity
= ÷ =

2 Adjusted financial leverage = Adjusted total assets ÷ Adjusted stockholders' equity
= ÷ =

Ratio Description The company
Adjusted financial leverage A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.
Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.
Automatic Data Processing Inc.'s adjusted financial leverage increased from 2015 to 2016 and from 2016 to 2017.

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Adjusted Return on Equity (ROE)

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Stockholders' equity (USD $ in thousands)
ROE1 % % % % % %
Adjusted for Goodwill
Adjusted net earnings (USD $ in thousands)
Adjusted stockholders' equity (USD $ in thousands)
Adjusted ROE2 % % % % % %

2017 Calculations

1 ROE = 100 × Net earnings ÷ Stockholders' equity
= 100 × ÷ = %

2 Adjusted ROE = 100 × Adjusted net earnings ÷ Adjusted stockholders' equity
= 100 × ÷ = %

Ratio Description The company
Adjusted ROE A profitability ratio calculated as adjusted net income divided by adjusted shareholders' equity. Automatic Data Processing Inc.'s adjusted ROE improved from 2015 to 2016 and from 2016 to 2017.

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Adjusted Return on Assets (ROA)

 
Jun 30, 2017 Jun 30, 2016 Jun 30, 2015 Jun 30, 2014 Jun 30, 2013 Jun 30, 2012
As Reported
Net earnings (USD $ in thousands)
Total assets (USD $ in thousands)
ROA1 % % % % % %
Adjusted for Goodwill
Adjusted net earnings (USD $ in thousands)
Adjusted total assets (USD $ in thousands)
Adjusted ROA2 % % % % % %

2017 Calculations

1 ROA = 100 × Net earnings ÷ Total assets
= 100 × ÷ = %

2 Adjusted ROA = 100 × Adjusted net earnings ÷ Adjusted total assets
= 100 × ÷ = %

Ratio Description The company
Adjusted ROA A profitability ratio calculated as adjusted net income divided by adjusted total assets. Automatic Data Processing Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

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